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Brief Article Of Interest - Lease Term ( 02/08/2005 )
A new lease being put into place will typically be for a total period
of 25 years. This will however be split up into an initial lease
period followed by options. For example a new lease may be for 10
years with 3 x 5 year options periods, to total 25 years.
The term of a lease (or length of a lease) is extremely important to
all parties concerned. It is the tenure to which the lessee has the
right to operate the business. It is also the tenure to which the
Lessor has a Lessee in place on the property and the period of time to
which he/she has the right to receive a rental income.
A long lease is beneficial to both the lessee and the lessor. From
the Lessees point of view a 20 year lease as opposed to a 5 year lease
gives he/she a longer tenure in which to make an income from the
business and property. It also makes it much more attractive to a
potential buyer when the lessee wishes to sell the business. From the
lessor’s point of view obviously a longer length lease offers more
security to receive the rental income from the lessee over a longer
period of time. Again when the lessor wishes to sell the property, a
long lease is far more attractive to a potential investor, as the
security of receiving rent is much better.
For Example
Leasehold Motel Business
Motel 1. Value of business based on trading figures is $300,000.
There is a 20 year lease in place. A potential buyer will pay
$300,000 for this business.
Motel 2. Value of the business based on trading figures is $300,000.
There is a 5 year lease in place. A potential buyer may only be
prepared to pay $150,000 for this business due to the short lease
tenure. Should the lessor be prepared to extend the lease then the
potential value may be back to the $300,000 level.
In summary the tenure of a lease over a motel will affect the value of
the business should there be limited time remaining on the lease, with
no opportunity to extend the lease tenure.
For more information on the above, feel free to contact Andrew Morgan
on 07 4953 1611 or email andrew@qthb.com.au
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